Interest is the amount paid by the borrower to the lender or is the money earned on the deposited funds. Interest is paid or earned as a percentage of the amount borrowed or invested, called principal. The percentage of the principal that is paid as a fee or earned as an interest is called the interest rate. The amount to interest depends on the interest rate, the amount of money borrowed (principal) and the length of time that the money is borrowed.
Simple interest is the most basic type of interest. It is the easiest type of interest to calculate and understand. Simple interest is calculated using the formula:
SI = P × r × t
P = Principal (the initial amount)
r = annual rate of interest in percentage
t = period of time
There is another way of writing the formula by converting the percentage.
SI = P × r × t/100
Amount to be paid at the end of period is the sum of principal and interest.
A = P + SI
Example:
Archie borrowed $200 at a 5% rate for 3 years. So the interest paid is:
SI = 200 × 5 × 3/100 = $30
Amount paid at the end of 3 years:
A = $200 + $30 = $230
Same formula can be modified to find the rate of interest, principal amount or time period.
Rate, r = SI × 100/(P × t)
Principal, P = SI × 100/(r × t)
Time, t = SI × 100/(P × r)
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